Are you one of those individuals who likes getting a refund when you file your taxes? Do you have kids under 18? If you said yes to both of those questions, you can’t go into next tax season without understanding what the child tax credit advance you just received means to you and how it impacts your coveted refund.

Background:

If you answered yes to both questions above, you either received a mysterious direct deposit or check in the mail related to the advance Child Tax Credit (CTC). The payment is to help many families get advance payments of the credit starting this summer.

But what is the child tax credit, how does it impact your taxes, and why should you care? Well, let’s walk through it. The examples below are for a married filing joint return with two children:

Example #1: you usually write a check when you file your taxes

Example #2: you usually get a refund

In summary, I wanted to illustrate that regardless of you getting a refund or writing a check when you file your taxes, your tax bill or refund will be impacted by the amount you received in advance. I want you to be prepared and understand the impact so there are no surprises next April.

The more technical details if you want to dig deeper:

The IRS will pay half the total credit amount in advance monthly payments beginning July 15. You will claim the other half when you file your 2021 income tax return. These changes apply to tax year 2021 only.

With the CTC changes for the tax year, there will be a lot of tax implications involved come April 2022 when your 2021 taxes are due.

First and foremost, the CTC payments are not taxable, but they are considered an advance of your credit. This advance is based upon the number of qualifying children claimed on your latest tax return.

There are several issues that can come up with this advance of the credit:

If your children are no longer considered qualified in 2021 due to age, divorce, etc., then the advance CTC payments will be added as income. If this happens, it is recommended to go to the IRS CTC Update Portal (https://www.irs.gov/credits-deductions/child-tax-credit-update-portal) in order to revise the status of your children so the advance payments are not needed to be reimbursed. This option is also available to those who wish to opt out of the advance payment and use the entire credit on their tax return.

In January 2022, the IRS will send you Letter 6419 showing the total amount of advance CTC payments. This amount is used to determine your CTC on your 2021 tax return. If the amount of the CTC exceeds your advance payments, then you will receive the balance as a credit on your return. However, if the amount of the advance payments exceeds the CTC, then you may need to repay the excess.

Of all the complications of starting your own business, understanding your tax liability can be one of the most difficult. Luckily, with a little help, the 1040 can be a cakewalk. For a small business owner, the two most significant sections of the 1040 are Schedule C and Schedule E. But many people struggle to find how to differentiate between the two. 

Schedule C of the 1040 form is for noting income earned by an individual from a business where they are the sole proprietor. The income you make directly from providing goods or services is applicable to Schedule C, and subject to self-employment tax in addition to standard income tax. This is the greatest drawback of sole proprietorships: self-employment tax can increase your tax payments by as much as 15%. This means that, as the sole proprietor of your personal business, you could be paying around 40% of your income in taxes.

Schedule E of the 1040 Form is for reporting passive income. Passive income is earnings received that don’t require working for. According to the IRS, passive income can be acquired through: rental income, profits from a business that one doesn’t actively work for, such as stock dividends or book royalties, real estate, trusts, limited partnerships, and most importantly, S corporation earnings. An S corporation is a corporation that chooses to pass income, losses, deductions, and credits through shareholders in order to avoid certain taxes, like the self-employment tax placed on Schedule C income. As an S corporation, the proprietor is now obligated to pay salary to any employees or shareholders, but only the amount paid in salary and wages is taxable through the business. The rest of the earnings are only affected by the proprietor’s standard annual income tax. The S Corporation effectively acts like a flow-through entity, passing all income from the business as the shareholder’s (or owner’s) personal income. This can lead to thousands of dollars in your pocket that would have otherwise been paid to the IRS as part of the self-employment tax.

Looking for ways to reduce your business income and ultimately your income tax liability this year? You may want to look at the Tax Cuts and Jobs Act Section 179 deduction. Many small business owners wonder about precisely what and how the Section 179 Deduction works. We can help. Schedule a consultation to talk with one of our experts.

This deduction was created as an incentive by the federal government for business to make investments in machinery and equipment. It was created to encourage business owners and decision makers to invest in company infrastructure, enhance business to business commerce, and as a result in the investment, more efficiencies in business processes.

The Section 179 Deduction allows small business to write off qualifying equipment purchased by a business as long as it serves business purposes more than 50% of the time. The equipment must also be put in service in the tax year that the 179 deduction is taken.

Rather than depreciating fixed assets over the duration of its use (5 years, 7 years, etc.), the entire cost can be written off in the year it was purchased allowing for a favorable tax treatment and reduction of tax liability in the given tax year.

Qualifying equipment includes any equipment or machines purchased for business use, tangible personal property used in business, computers and software, office furniture and equipment, business vehicles with a gross vehicle weight of over 6,000 lbs., and even certain property and improvements to property like security systems, roofing, etc. All qualifying equipment can be new or used, but must be newly purchased by the businesses.

The Section 179 Deduction does have limitations. As of 2020, the total amount that can be written off for the year cannot be more than $1,040,000, and the total amount paid for equipment cannot exceed $2,590,000. As a result, the deduction ceases to take effect if purchases reach a balance of $3,630,000.

California, however, does not conform to federal Section 179 deductions. California limitations are a maximum dollar limitation for the deduction of $25,000 and a threshold for property placed in service in the current year of $200,000.

For more information please see https://www.irs.gov/instructions/i4562#d0e3005 or https://www.section179.org/section_179_vehicle_deductions/

We have had many conversations with clients who are working to be compliant with new CA AB-5 ruling effective January 1, 2020.

The need to be compliant is imperative and I’m happy to provide my opinion on point C of the ABC test. From reading the AB 5 language and various other trusted resources, being a taxable entity is not the only way to be compliant within AB-5 section C. I do know that if an entity is incorporated the argument for passing C is solid, but I do not believe required. Instead, incorporation is an example of “the usual steps to establish and promote that independent business.” Another example includes “routine offerings to provide the services of the independent business to the public or to a number of potential customers,” which some of our my clients clearly meet. https://www.dir.ca.gov/dlse/faq_independentcontractor.htm

In the case of some of my professional services client, and to add additional confidence, the section of AB-5 I copied below specifically calls out an exception for bona fide business-to business contracting relationships and the criteria to be considered an independent contractor. In criteria (e)(1)(F) they also use the term “independently established business,” but this criteria is used to describe a cross-section of the population described in (e)(1) of “sole proprietorships, partnerships, LLCs, LLPs, or corporations.”

If by “independently established business,” they meant only incorporated entities, all other business types other than corporations would automatically fail this test, but by placing it as a subset criteria I believe that your LLC is a bona fide business to business contracting relationship.

(e) Subdivision (a) and the holding in Dynamex do not apply to a bona fide business-to-business contracting relationship, as defined below, under the following conditions:

(1) If a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) contracts to provide services to another such business (“contracting business”), the determination of employee or independent contractor status of the business services provider shall be governed by Borello, if the contracting business demonstrates that all of the following criteria are satisfied:

(A) The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.

(C) The contract with the business service provider is in writing.

(D) If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.

(E) The business service provider maintains a business location that is separate from the business or work location of the contracting business.

(F) The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.

(G) The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.

(H) The business service provider advertises and holds itself out to the public as available to provide the same or similar services.

(I) The business service provider provides its own tools, vehicles, and equipment to perform the services.

(J) The business service provider can negotiate its own rates.

(K) Consistent with the nature of the work, the business service provider can set its own hours and location of work.

If you are in business for yourself, you generally need to make estimated tax payments. Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. The IRS urges taxpayers to check into their options to avoid these penalties. Adjusting withholding on their paychecks or the amount of their estimated tax payments can help prevent penalties. This is especially important for people in the sharing economy, those with more than one job and those with major changes in their life, like a recent marriage or a new child.

Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax. If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.

Individuals, including sole proprietors, partners, and S corporation shareholders, generally use Form 1040-ES (PDF), to figure estimated tax. For estimated tax purposes, the year is divided into four payment periods. Each period has a pay online, by phone, or by mail.

Estimated tax payments are due as follows:

• January 1 to March 31 – April 15

• April 1 to May 31 – June 15

• June 1 to August 31 - September 15

• September 1 to December 31 – January 15 of the following year

Please put the above dates in your calendar and reach out to me at 858 367-3112 if you need help.

If you'd like to read the full details, please visit: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

Here's your bipartison summary and explaination of the new tax bill. This doesn't tell you how it will directly impact you, but we can help. First listen and then reach out to us for help proactively manage your 2018 tax liability.